Markets prefer certainty. In times of relative economic certainty, market trends can be more defined and steadier. In times of economic uncertainty, markets react with volatility similar to the past 6 to 7 months. Two simple pieces of data:
- The 10-year US Treasury yield was as high as 5.0% in late-October, then as low as 3.79% just after Christmas, then back up to 4.28% in March and very recently higher to 4.68% a mere few days ago. These levels – and the speed with which they have changed – represent fairly massive volatility based on historical 10-year US Treasury rates.
- In the US stock markets, there has been similar volatility in both small-company indexes and the larger-company S&P 500 since last year with a noticeably weak 3Q 2023 and then all-time highs taking place just this past April 2024.
What factors are creating the current uncertainty? And what can an investor do?
Primary factors creating uncertainty are: inflation, prices of consumer items and major purchases, interest rates, economic growth and growth expectations, job security, job openings, wages and total compensation, world events… the list goes on. Oh, and the US presidential election in the Fall. The uncertainty of the last item alone may be one of the biggest reasons markets have been so volatile.
Investors are wise to ignore shorter-term volatility and instead focus on and decide bigger picture and long-term positioning, including:
- levels of cash in savings for emergencies and peace of mind
- amounts of spending on essential items
- amounts of and ability to adjust spending on lifestyle and discretionary categories
- ability to contribute and amounts being regularly contributed to 401k accounts and IRAs
- overall asset allocation between stocks, bonds, cash and real estate – after the above items have been determined.
If market volatility continues, which is likely, confirming an asset allocation and having a periodic savings strategy in place can lessen anxiety. Doesn’t that sound like a solid idea going into Spring and Summer?
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.